Putting sin taxes to the test in Durham

With Thanksgiving behind us, many Americans will not assemble together for a home-cooked meal again for a while.

By some estimates, people living in large cities consume the majority of their meals outside the home – at restaurants, coffee shops, bars and food trucks. No surprise, then, that anti-obesity policies are increasingly focused on helping Americans make healthier choices when eating in these establishments. Such policies range from gentle informational campaigns (such as the FDA’s calorie count mandate) to heavier-handed policies (such as former New York City Mayor Bloomberg’s attempt to ban the sale of large sodas).

But with evidence suggesting that calorie information requirements are too hands-off to affect behavior, and with courts concluding that soda bans are too hands-on to be legal, anti-obesity experts are pushing for a more moderate policy intervention. That is why fat and sugar taxes may soon be coming to your local restaurant.

The thinking behind such sin taxes is straightforward: If you make unhealthy food more expensive, people will be less likely to buy it. The problem with this simple way of putting it is that it doesn’t capture the complex way people respond to economic signals when dining out.

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According to standard economic theory, people at a restaurant separately assess such things as how much they would enjoy the steak versus the chicken and the size of each entrée, and then factor in the price before deciding on what to order.

What this theory overlooks is that when people make such choices, they frequently use price information to gauge the quality and quantity of available meals. They might assume that the $12 steak is more expensive than the $10 chicken entrée because the ingredients in the steak are more expensive, more plentiful or higher quality. In a famous example of this phenomenon, people asked to judge the quality of several wines picked a $100 bottle as being superior to a $10 bottle, even though the researchers had pulled a fast one on them and the two wines were identical.

This same influence could cause restaurant sin taxes to backfire. Merely hiking the price of a fatty steak by, say, 15 percent might make the steak appear more appealing. In fact, when researchers have studied taxes on unhealthy foods, they have found little effect on people’s choices.

We recently put sin taxes to the test in a Durham restaurant called Six Plates, so named for the six new entrees it offers on its menu each month. Prior to rotating the monthly menu recently, the restaurant’s chef informed us that three of the six dishes were particularly high in fat and calories. With that information in mind, we ran an experiment. Some days that month, customers received the standard menu with descriptions of the six dishes and their standard prices. On those days, approximately half of the entrees people ordered were the higher calorie options. On other days, chosen at random, we raised the price of these three less-healthy dishes by 15.5 percent. We found that the price hike had no discernible effect on what people ordered.

But our experiment did not end there. On yet other random days of the month, we placed an asterisk next to these three dishes, informing customers that the restaurant raised the price of these dishes 15.5 percent as a surcharge for their being high in fat and calories. On those days, people ordered those high-calorie entrees only 30 percent of the time.

From that, we can conclude that the tax on its own sent a mixed signal – people couldn’t tell why the entrees were higher priced. But when the size and reason for the tax were made explicit, people became less likely to order those dishes.

Momentum is building to tax unhealthy foods. Citizens of Berkeley, California, for instance, recently voted to support a tax on sugar-sweetened beverages. The European Union is considering a wide range of taxes on foods high in sugar, salt or fat.

If we are indeed going to tax restaurant food for being unhealthy, we should not expect price alone to do all of our dirty work. To maximize the effect of price changes, we need to explicitly explain these taxes. Sometimes the invisible hand of the market works better when the reason for high prices is out in plain sight.

Peter Ubel, a physician and behavioral scientist, is professor of business, public policy and medicine at Duke University. Avni Shah is a doctoral student studying consumer behavior at Duke.